Outstanding prop Josh Papalii beat four opponents for a converted try which put the hosts 10 points up with eight minutes to go.
Campbell Graham crossed for Souths in the 78th minute but his try proved no more than a consolation for the 2014 champions, who also fell one game short of last year's grand final.
Papalii was Canberra's best but they may be sweating on his availability after he was placed on report for a shot on fullback Adam Doueihi.
The consensus among the pundits was that the tackle was not bad enough to warrant missing the NRL's showpiece match.
A grand final return has been a long time coming for the Raiders. This will be their first appearance since beating the Bulldogs in the 1994 decider.
That capped the end of the Green Machine heyday of five grand finals in eight years (for two wins) in a team that featured the likes of Mal Meninga, Laurie Daley and Bradley Clyde, Kiwis Brent Todd, Ruben Wiki and Quentin Pongia, and current Raiders coach Ricky Stuart.
This arm wrestle of a match was level at a converted try apiece at halftime. Skipper Jarrod Croker opened the scoring for Canberra in the 16th minute and fellow centre Dane Gagai responded in the 27th.
Jack Wighton broke the deadlock when he toed ahead a ball that was inches away from being a knock-on to score in the corner four minutes into the second half.
The Raiders will be underdogs in next Sunday's grand final against either the Storm or Roosters, the two most dominant teams of recent seasons who meet in tonight's semifinal at the Sydney Cricket Ground.
Canberra Raiders 16 (Jarrod Croker, Jack Wighton, Josh Papalii tries; Croker 2 cons)
South Sydney Rabbitohs 10 (Dane Gagai, Campbell Graham tries; Adam Reynolds con)
HT: 6-6
